No-nonsense Guide to Sugar Reforms Is Here: Can Govt Muster Courage?

The prime minister’s chief economic advisor, Dr C Rangarajan, is not a man who minces his words. So, it is not surprising that his road map to reform the highly controlled sugar sector, submitted to the government last week, is remarkable for the sheer number of entrenched interests it challenges.

Take farmers. For years, government fixed the statutory minimum price for sugarcane paid by mills to farmers on an input cost-based formula. A couple of seasons ago, government shifted to a demand-side pricing formula called Fair and Remunerative Price, where the costs were topped with a reasonable premium for the cane. Now Rangarajan has proposed stage-three — a revenue-sharing formula where farmers will be paid 70% of the price sugar fetches in the market. The advantage to farmers is easy to understand.

In the current season, under the cost-based formula, their cane would fetch Rs 162 a quintal. Under the FRP, it would fetch Rs 210. And under the new mechanism, if sugar is selling in wholesale for Rs 35 a kilo, the cane would be worth Rs 262, of which farmers would receive Rs 210 as soon as they deliver the cane. The remainder would be paid after tracking sugar prices quarterly. If sugar prices rise, cane price would rise too.

But already farmer lobbies are split. While Maharashtra, Karnataka and Tamil Nadu farmers have welcomed the proposal, UP farmers are preparing to oppose it tooth and nail.

They fear mills will deliberately depress sugar prices to short change them. They want the state government to continue deciding the cane price because it uses political negotiation, not maths.

The new road map wants mills to compete at every step. For cane, by removing the system of demarcating fields exclusively for each mill; in the sugar market, by removing government control over timing and volume of sales; in the export market, by dismantling the quota raj. For most mills, this would mean swimming with the sharks. Though industry associations are loudly welcoming the proposal, everyone knows the bodies will soon start piling up.

State governments will be annoyed because the plan suggests doing away with their power to meddle through populist cane prices, playing mills against farmers, and red tape. How else will local MPs and MLAs play god? The new plan also wants states to buy sugar from the open market to supply ration shops instead of receiving train-loads from Food Corporation of India. This would be a crushing blow to all those officials, politicians and black market operators who profit from diverting almost 3 million tonne of sugar meant to be sold to the poor for Rs 13.50/kg to the open market where it can fetch three times more. The industry takes a hit of Rs 3,000 crore annually in supplying the sugar. So you can imagine the money involved in this fiddle.

West Bengal jute barons will be an equally irate lot. For last 30 years, mills have been forced to package sugar in jute bags, which let in moisture, are full of loose fibre, and cost almost double the price of a HDPE bag. The new plan says mills should be free to use more technologically advanced packaging.

Dr Rangarajan then does the unthinkable by striking at the roots of the powerful alcohol lobby. Most state governments force mills to sell molasses — a byproduct of sugar and the raw material for alcohol — at throwaway prices to benefit liquor and chemical companies.

The new plan suggests giving mills full freedom to sell molasses to the highest bidder anywhere in the country. In short, sugar barons should stop subsidising liquor kings. When Prime Minister Manmohan Singh handpicked Dr Rangarajan to chart the road ahead for sugar, he knew it would be a nononsense guide.

Dr Rangarajan has used economic logic to demolish the fiefdom of those rent-seekers, kickback takers, unscrupulous politicians, and effete business that have battened on the sugar industry for decades. The big question now is whether the government will muster the courage to take on all these lobbies.

It can make a start by asking states to buy ration shop sugar from the open market, and free mills to deal with market forces. The rest will take a couple more years to even bring to the table. Truth is, if it is allowed to run according to the rules of good business, the world’s second largest sugar industry can easily attract the kind of foreign investment needed to make a dramatic impact on the lives of 50 million Indian farmers. FDI in retail is nothing to it.

DISCLAIMER : Views expressed above are the author's own.

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Author

Nidhi Nath Srinivas blogs as the CEO of Ncdex Institute of Commodity Research, an independent think-tank and education body dedicated to strengthening the understanding of physical and derivative commodity markets, and fostering theeconomic and social welfare of individuals and businesses through free and transparent commodity markets. She is also Chief Marketing Officer at Ncdex, the leading national commodity exchange. Previously, she worked in The Economic Times as the Commodities Editor. The views are personal.